The hidden dangers of money laundering

Amid Bangladesh's rapidly expanding foreign trade, trade-based money laundering has become a major concern for the banking industry, a recent survey by the Bangladesh Institute of Bank Management has found. This includes over- and under-invoicing of goods and services and mis-declaration of goods.

The survey also said that money laundering is being facilitated by collusion between importers, exporters and bank officials who are at times getting involved in these illegal transactions. Having agreed with this, Moinul Khan, commissioner of Customs Valuation and Internal Audit Commissionerate, said that, “There is a minimum price limit for products but no maximum limit, as a result, fraudsters can easily launder money.”

If we put this together with the findings of a Global Financial Integrity (GFI) report titled, “Illicit Financial Flows (IFFs) to and from Developing countries: 2005-2014,” the picture becomes much clearer and concerning at the same time. According to the GFI report, between 2005 and 2014, IFFs likely accounted for 14.1-24 percent of total developing country trade, on average, with outflow estimates being 4.6-7.2 percent and inflow 9.5-16.8 percent. The primary means for shifting funds in and out was trade misinvoicing at an estimated average of 87 percent.

If we focus on Bangladesh, GFI estimates that between 2005-2014, illicit financial outflows stood at 12-17 percent and inflows at 4-12 percent of Bangladesh's total trade. Total unrecorded capital flow from the country amounted to USD 61.61 billion during the time—USD 56.83 billion through trade misinvoicing.

Needless to say, money laundering causes major problems for any country, perhaps more so for developing ones. This is especially so for a country like Bangladesh that is still struggling to significantly increase investment and, according to the government, generate enough tax revenue.

As money laundering leads to huge amounts of money remaining unaccounted for and untaxed, this also means higher tax rates in general than would normally be necessary and higher costs of living as a result. Thus, it greatly harms honest taxpayers, distorts commodity prices, results in misallocation of resources and expose financial institutions to greater risks than normal, etc.

But apart from the more obvious problems, money laundering could also pose major security risks for a country and endanger its national interests. As the BB's own guideline states, “the sheer magnitude of the economic power that accrues to criminals from money laundering has a corrupting effect on all elements of society.” For example, illicit flow of funds has often been found to be associated with criminal networks involved in a whole host of crimes that are interconnected, such as drug trafficking, arms-dealing, extremist funding and, perhaps the most egregious of all, human trafficking.

Last year, the US, in its Human Trafficking Report 2017, downgraded Bangladesh to the Tier 2 Watch List, as the Bangladesh government did “not fully meet the minimum standards for the elimination of trafficking.” While the number of victims identified by the government has decreased, the report raised the question whether it was because of a lack of capacity on part of the Bangladesh government to track, trace and record the number of human trafficking victims. Moreover, according to a Unicef report, “Human trafficking in Bangladesh is believed to be extensive both within the country and to India, Pakistan and the Middle East,” and “Many girls” from Bangladesh “are trafficked into sexual exploitation or bonded servitude.” And as the Independent (UK) revealed last year, Bangladesh was the single largest origin for refugees to Europe by boat in 2017, which is another indication that this danger does indeed exist.

Also alarming in that regard should be the astronomical increase in Yaba and other drug trade in the country—another concern that frequently arises from the plague of money laundering. For example, data from the Department of Narcotics Control show that seizures of Yaba went up from being 36,543 pills in 2008 to 812,716 pills in 2010 to a mammoth 29,450,178 pills in 2016. And we have already witnessed the danger of extremist financing and arms dealing from different past incidents.

All of these problems could become more prominent if criminal networks are allowed to thrive by ignoring the threat of money laundering. However, one major issue that all governments face when it comes to addressing it is that, “By co-mingling the proceeds of crime with the proceeds of legitimate business, launderers are able to disguise the ultimate source of the illicit money,” as the GFI report described.

And, as the Bangladesh Bank's “Guideline on Prevention of Money Laundering and Combating Financing of Terrorism for Capital Market Intermediaries” admits, “Crime has become increasingly international in scope, and the financial aspects of crime have become more complex due to rapid advances in technology and globalisation of the financial services industry.” Simply put, criminal networks have increasingly become transnational in scope. And with technological advances and the advent of offshore accounts, etc. addressing the problem of money laundering and stopping criminal networks from exploiting the clear limitations of our government (or most governments for that matter), has become extremely difficult, if not near impossible.

Which is why, to address it, our government should work more proactively with other governments and organisations from around the world, that are seriously looking to curb the problem of money laundering and offshore accounting (and their related issues) since recent revelations (such as the Panama and Paradise Papers which were global in scale) have brought them into the limelight. And it also needs to negotiate with international banks for access to transaction information when necessary—as it had previously been denied such access by Swiss banks—because without it, the task of tracking illicit financial flows becomes extremely difficult.

On the domestic front, the BB's guidelines on preventing money laundering already states that “Institutions and intermediaries must keep transaction records that are comprehensive enough to establish an audit trial.” However, how well are those being maintained?

Should one look at the recent history of our banking sector, one would assume, “not very well”. This too must change and the government is the only one that can hold banks accountable when it comes to that. But even that won't do much good if those records are not properly audited which, again, will require serious and sincere government effort.

The fact of the matter is that money laundering is one of those problems that are always much bigger than what they seem at first glance, as most activities related to it occur under the surface and because it gives rise to so many other difficulties. However, if ignored, they may eventually burst out from underneath and cause major problems for any nation, including ours, which is why the government and all its agencies should look to address it as soon as possible.

Eresh Omar Jamal is a member of the editorial team at The Daily Star. His Twitter handle is: @EreshOmarJamal

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